Power and Utilities Mergers and Acquisitions Decline 30% in Q1 2012

May 21, 2012 /

The re-emergence of natural gas as the preferred fuel source for power generation is having a significant knock-on effect for power and utilities M&A activity according to the Ernst & Young Power Transactions and Trends report.

The combination of continued economic uncertainty, tightening financial markets and disparity in global gas pricing has resulted in Q1 2012 total deal volume falling 30% from Q4 2011 and a 16% drop in corporate deal volumes year-on-year.

Power Transactions and Trends Quarterly is based on Ernst & Young’s analysis of Mergermarket data from Q1 2010 to Q1 2012. This analysis utilizes standard industrial classification codes in order to categorize deals.

According to another report by PwC, the number of announced deals greater than $50 million in Q1 2012 remained flat with Q4 2011 at five deals. However, the total deal value decreased 92 percent from Q4 2011 due to the Kinder Morgan / El Paso Corp $36 billion deal in the prior quarter. Deal volume in the first quarter of 2012 was up slightly over the previous quarter, putting the quarter-over-quarter deal volume at 31 announced deals, an increase of 3 percent.

Joseph Fontana, Ernst & Young Global Transaction Advisory Power and Utilities Leader, comments, “The continued decline in natural gas prices in the US remains one of the sectors most talked about issues and is having far reaching effects. We are yet to see the full impact from an M&A perspective, however we expect this to change in the remainder of 2012 as companies seek to position themselves, particularly in the US, for sustained low prices and abundant supply.”

The power and utilities sector declined by 55% year-on-year in the first quarter of 2012, primarily due to the sharp decrease in M&A activity led by slow economic recovery. However, recent activity in the generation segment bucked the downward trend and increased total Q1 2012 deal value by 20% over Q4 2011 reaching US$26.0bn, with generation contributing 63% of global deal value. This is largely due to GDF Suez’s US$10.1bn amended offer for the remaining equity in International Power Plc, which was launched in late March 2012.

With many regulators globally focusing on pollution reduction and air quality improvement, power and utilities are looking to re-align their fuel mix with a focus on clean energy. Although renewables accounted for the greatest number of deals (23) in Q1 2012, volume declined 36% over Q4 2011 levels.

Renewables are currently struggling to compete against gas-fired generation. This is due to low natural gas prices in North America, higher capital costs and the recent pull-back in the levels of government support or consumer subsidy for wind and solar, in both Europe and the US.

Europe continued to shape the global power and utilities M&A landscape during Q1 2012, accounting for 48% of deal volume and 71% of deal value, through domestic privatization and asset disposal programs. The Eurozone debt crisis and its impact on the power and utilities sector remained central to M&A decisions, with dealmakers balancing financial discipline, consolidation in core markets and the need to gain traction in higher growth emerging markets.

Asia-Pacific Q1 2012 M&A activity, which previously experienced a significant growth rate of over 70% in Q4 2011, reported a deal volume drop of 58% and a deal value decline of 35%, compared to the previous quarter, as the region returned to more sustainable deal levels. Americas’ deal volume maintained an overall flattish trend during the quarter.

Looking forward, Fontana comments, “While fiscal tightening by European banks might restrict future M&A activity, the growing number of asset disposal programs by European utilities and government privatization programs is expected to drive deal flow in the short term. We also expect significant activity in Latin America, particularly Columbia, Brazil, and Chile, reflecting strong underlying economic growth and restricted access to credit forcing M&A to be top of mind.

“Asia-Pacific investors, particularly those in China and Japan, are likely to continue to feature prominently in the 2012 M&A space. Chinese investors have demonstrated their willingness to acquire overseas and any further softening of asset valuations in Europe will spark deal interest among Asia-Pacific buyers.”


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